If $1 million will afford you a comfortable retirement, how far would a quarter of that amount go? It might surprise you to know you can make $250,000 last for decades in retirement. While you’ll need a detailed plan and sufficient Social Security income, it’s possible to leave the workforce with this modest amount. Here are the factors to consider.
A financial advisor can help you create a financial plan for your retirement needs and goals.
How Long Will $250,000 Last in Retirement?
How long $250,000 will last in retirement depends on your retirement expenses. As a result, your location, lifestyle, health status, and tax circumstances will dictate how long you can stretch $250,000.
For example, a single retiree in Hawaii, the most expensive state, needs about $90,000 per year to live. Therefore, $250,000 will last about two years and eight months before running out.
On the other hand, Mississippi is currently the most affordable state for retirees. The average retiree spends about $39,500 annually in the state, meaning a quarter of a million dollars will last over six years.
A middle-of-the-road example would be Pennsylvania, where your average annual expenses are about $46,400 in retirement. In this situation, your nest egg would last around five years and four months.
Remember, the above figures don’t account for interest or investment income, which help your nest egg last longer. That said, your rate of return on $250,000 would provide an additional $10,000 per year if you estimate conservatively.
In addition, it’s vital to evaluate your individual circumstances when planning for retirement. For example, if you have a chronic health condition that costs about $10,000 annually for adequate care, your cost of living will be more expensive. On the other hand, if you have no health complications and live in a paid-off house in an affordable state like Oklahoma, your retirement fund will have more longevity.
How to Determine How Long Your Retirement Savings Will Last
The longevity of $250,000 in your retirement savings depends on several factors: your expenses, investment rate of return and withdrawal strategy. Here’s how to evaluate these aspects when planning for retirement:
The amount of money you spend in retirement determines your ability to live on a specific income. Understanding your lifestyle means you can identify your monthly expenses. So, you can add up your expenditures and weigh them against your income.
For instance, if you paid off your mortgage before retirement and don’t plan on traveling, your budget will be lighter. This situation would leave just property taxes, utilities and repairs for housing costs. On average, these expenses are about $9,000 annually. But costs vary by location.
In addition, your life expectancy is a crucial factor. For instance, if you retire at 67 and expect to live until 80, you’ll have a 13-year retirement. So, you’ll multiply your annual cost of living by 13 to get a rough estimate of your total retirement cost.
However, this figure is less accurate because inflation increases the cost of living every year. You can get more precise by increasing your annual expenses by 3% each year to simulate inflation. For instance, a $40,000 budget would increase to $41,200 the following year and so on. In the 13th year, the equivalent living expenses you started with would cost $58,741.
Next, healthcare expenditures are inevitable in retirement. From Medicare premiums to out-of-pocket costs, you’ll have annual medical expenses. Therefore, experts advise planning to spend 15% of your money on health costs. So, a $250,000 nest egg would designate at least $37,500 for this expense.
Estimate Rate of Return
Your rate of return also influences how long a $250,000 nest egg will last. For example, a 3% return provides $7,500 per year, while a 7% return provides $17,500. This small swing in percentage can provide several more years of income, so maximizing your rate of return is critical. You can do so with the following retirement accounts:
- Investing through an individual retirement account (IRA) or 401(k) can provide larger gains. For instance, a portfolio invested in the S&P 500 index has provided an average annual return of 10% since its inception. Assuming 3% inflation and 0.5% management fees, $250,000 can provide $16,250 of income per year. This means you’ll withdraw less of the principal, making your funds last longer.
- An annuity can provide guaranteed payments for life after you retire. In other words, you can purchase a contract for $250,000 and this asset will send you a monthly check as long as you live. Buying an annuity for immediate payout decreases your monthly payment. On the other hand, delaying payment will increase it. If you buy the annuity at 45 and retire at 65, you’ll receive $2,475 per month in perpetuity.
- Rising interest rates have made bank accounts viable retirement savings vehicles. Specifically, high-yield savings accounts have interest rates of 4%. The benefit is you earn money without risking it in stocks, real estate and other assets.
- Plus, the FDIC insures bank accounts up to $250,000, so your money is safe if your bank goes belly up. Therefore, a straightforward savings account can create $10,000 of annual income from your nest egg. The downside is that interest rates can change at a moment’s notice, leaving you with less income than before.
Pinpoint Withdrawal Strategy
Your withdrawal strategy affects how long your money will last. For example, waiting until age 59.5 or later to withdraw money from an IRA or 401(k) means sidestepping early withdrawal penalties.
It’s best to avoid starting withdrawals when the stock market is down. For example, a 20% loss in your retirement account could shrink your nest egg to $200,000. This situation would start your retirement on the wrong foot and withdrawing money would further compound your losses.
Moreover, it’s advantageous to coordinate your withdrawals with Social Security distributions, which will supplement your income. For example, you can boost your Social Security check by 24% by retiring at 65 instead of 62.
So, a $2,500 monthly check at age 62 would become about $3,100 at 65. That’s over $7,200 of annual income you would receive in Social Security benefits instead of taking it from your retirement account.
Use a Retirement Calculator
A retirement calculator can expedite your planning process. First, you’ll enter your age, location, retirement savings, Social Security age, desired income level and retirement account type. Then, the calculator will show how much income you need per year, accounting for inflation and taxes. So, instead of hunching over a piece of paper and trying to crunch numbers, you can enter your information and sit back while the online calculator does the work.
Other Factors to Consider
No one knows how long their retirement will last. But it’s generally safe to assume you’ll be retired for at least 20 years. Advances in medical care have extended Americans’ lifespans, meaning it’s possible to outlive your retirement. Therefore, it’s crucial to live within your means during your golden years.
As the last year has shown us, inflation can flare up due to causes outside our control. Global supply chain issues and international conflict have increased the cost of essentials like food and fuel, straining budgets across the country. So, you might have to give up a few luxuries or pick up part-time work to make ends meet.
The stock market has never been risk-free. So, the longer your nest egg is exposed to the rise and fall of the economy, the more you risk losing retirement money. Generally, it’s recommended to shift your investments to the conservative side in retirement. Therefore, diversifying your portfolio is an excellent idea, as is investing heavily in bonds, preferred stocks and money market funds.
How to Maximize Your Retirement Savings
Stretching your retirement savings as long as possible will help you enjoy a long, comfortable retirement.
Follow the 4% Rule
Limiting yourself to withdrawing no more than 4% of your nest egg per year can often make your money last for decades. The 4% rule means counting on your retirement fund for a 4% annual return. So, you’ll invest $250,000 in a way that provides an average of a 4% return, which is $10,000.
On the other hand, the 4% rule doesn’t help when your investment income drops. During periods of market volatility, your nest egg will struggle to produce gains. This scenario means withdrawing $10,000 would mean touching your principal, which would in turn have less earning power in the future.
So, it’s best to leave the money alone if you can. Doing so will give your retirement account a chance to recover and produce adequate income down the road.
Guarantee the Basics
Once you know your essential expenses, such as food, housing and transportation, you’ll know how easy it is to cover them through a guaranteed income. For example, your permanent income streams in retirement might be Social Security, an annuity and investment property. Together, these provide $3,000 of monthly income.
The Bottom Line
How long $250,000 will last in retirement depends on your retirement expenses. As a result, your location, lifestyle, health status and tax circumstances will dictate how long you can stretch $250,000. It’s vital to evaluate your individual circumstances when planning for retirement.
Tips on Retiring on $250,000
- Managing a nest egg with little margin for error can be daunting. Living off of $250,000 can mean tightening your belt when the stock market dips. But a financial advisor can provide tips on maximizing your income in the hard times. You’ll receive guidance on investing in low-risk assets that perform well in any economy. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Understanding how your nest egg affects your tax situation can be challenging. However, you can simplify your taxes by moving to a tax-friendly state in retirement.
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